Sunday, July 25, 2010By Krisztina Than and Gergely Szakacs ,Reuters

BUDAPEST -- Two top ratings agencies said on Friday they might downgrade Hungary's sovereign debt after its prime minister snubbed the IMF and rejected austerity measures in favour of a pro-growth policy.

Moody's placed Hungary's Baa1 local and foreign currency government bond ratings on review, citing increased fiscal risks after the International Monetary Fund and the European Union suspended talks over their 20-billion-euro (US$25-billion) financing deal with Budapest at the weekend.

Ratings agency S&P said later it had revised its outlook on Hungary to negative from stable, while affirming its BBB-/A-3 rating, which is already lower than Moody's.

Prime Minister Viktor Orban, whose center-right Fidesz party swept into power in April, has spurned warnings that Hungary could face market pressure and currency weakness without support from international lenders.

Orban, whose party holds a more than two-thirds majority in parliament, has pledged to end the belt-tightening pursued by the previous Socialist government.

Moody's said it expected the government to resume talks with lenders after the municipal vote and that it was likely to confirm Hungary's current rating if there was a credible commitment to the IMF's previously proposed fiscal targets.

“However, if the new fiscal targets that emerge from the next round of talks imply a less rapid fiscal consolidation path, then a one-notch rating downgrade is likely,” it said.

Moody's told Reuters it would decide within four months whether to downgrade Hungary.

Orban has said the government will meet this year's deficit goal, specified in the current IMF deal, but will allow the deal to expire in October, and said Hungary only needed to talk with the European Union about the 2011 budget.

Asked on Friday if Hungary wanted a new loan from the IMF, Orban told ATV: “No. The Hungarian economy must be financed from the market.”

He said Hungary's biggest problem was weak growth. “In the sphere of the European economy, the position of the Hungarian economy is currently good. We have a single weakness, the most painful, and this is low (economic) growth.”

The IMF has said it is open to resuming talks but wants Hungary to abandon some steps approved by parliament on Thursday including a bank tax which it says will squeeze lending and hamper growth, and has called for structural reforms.

Hungarians, worn out by a deep recession last year, appear to have embraced the government's tough stance against the IMF as well as the bank tax, though foreign currency loan holders are concerned about the forint.